One of the most important financial decisions you make could mean thousands more dollars of income in retirement. How and when you claim Social Security could completely change your retirement lifestyle – but it’s complicated! The Social Security Administration’s Basic Guide to Social Security Programs contains 2,728 rules! Joe Anderson, CFP® and Big Al Clopine, CPA answer the most commonly asked Social Security questions, and they help you avoid the mistakes that could reduce your Social Security benefits.
Most Common Social Security Questions
- Social Security Basics
- Advanced Social Security Claiming Strategies
- Maxing Out Your Social Security Benefits
Important Points:
- 00:00 – Intro
- 01:07 – Reliance on Social Security in Retirement
- 02:17 – What Are the Different Types of Social Security Benefits?
- 03:40 – How Much Do I Pay into Social Security in 2024
- 04:52 – What is Social Security “Full Retirement Age?”
- 05:28 – How Are Social Security Benefits Taxed in 2024?
- 07:37 – Can I Work and Collect Social Security Benefits?
- 08:30 – Download the Social Security Handbook
- 09:33 – Can I Suspend Social Security Benefits and Restart Them at a Higher Amount?
- 11:46 – What is the Social Security Break-Even Age?
- 13:16 – Can I Collect My Own Benefit and a Survivor Benefit?
- 15:44 – Can I Collect Social Security If I Have a Pension?
- 17:02 – Download the Social Security Handbook
- 17:59 – Will I Be Automatically Enrolled in Medicare When I Claim Social Security Benefits?
- 19:15 – What Are the Maximum Social Security Benefits in 2024?
- 20:04 – How Are Social Security Benefits Calculated?
- 20:32 – Is There a Way to Avoid Paying Taxes on My Social Security Income?
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Transcript:
Joe: Hey, a very important decision that retirees need to make is how to claim Social Security. Do you have questions? Guess what? Big Al has the answers. Welcome to the show, everyone. The show’s called Your Money, Your Wealth®. Joe Anderson here. I’m a CERTIFIED FINANCIAL PLANNER™, President of Pure Financial Advisors, and of course, I’m with Mr. Social Security himself, Alan Clopine.
Al: Well, I would say you are Mr. Social Security, but we’ll see who knows more, right?
Joe: Yeah. Well, you’re closer to claiming your-
Al: -closer to the age? That is a true statement.
Joe: We’re going to break it down. We’re going to break down the most common questions that all of you have in regards to Social Security because there’s 2700 rules in the rule book of Social Security. Do you know them all? Of course not. This is confusing stuff. We got the answers. That’s today’s Financial Focus.
Joe: All right. Why is this important? Well, reliance on Social Security. 37% of men need Social Security for over 50% of their income. 42% of women. So this is a huge part of the retirement income strategy. Over 50% or almost half here. All right, Social Security was not meant to replace our incomes. It is a supplemental income, but people are leaving hundreds of thousands of dollars on the table because they’re not claiming correctly. Let’s figure it out. Let’s bring in the big man.
Al: All right, Social Security, the questions that you may have, we’re going to get into them. We’re going to start with the basics, because you got to have some foundation before we start getting a little bit more advanced. We’ll look at some advanced strategies, and then to make it even better, let’s figure out how to really max out your Social Security. So Joe, I think this is a topic that virtually everyone needs to listen to, or almost everybody, virtually everybody, because almost everyone is covered by Social Security.
Social Security Basics
Joe: It doesn’t matter necessarily how big of a net worth they have. I think this is really important to most people because, you know, we pay into the system year after year, and we want to make sure that we maximize those benefits coming out. So let’s get into it. There’s 4 different types of benefits in the Social Security Administration system. There’s a standard retirement benefit. Then there’s a disability benefit. There’s a survivor benefit and a supplemental benefit. There’s also a spousal benefit. So if you are married and you’ve never put into the system, but as long as you have a spouse or been married to a spouse for at least 10 years, you can claim on your spouse’s benefit, which would be 50% of their full retirement benefit or 50% of an ex-spouse’s benefit. Disability. So there’s a disability benefit. If you qualify, it’s pretty challenging to qualify for disability benefits, but there is a pool of money here for disabled workers to get a benefit. A survivor benefit is also pretty big. So you are married, one spouse’s dies. So then one, let’s say if they’re both claiming Social Security. If one spouse dies, that benefit goes away, but the surviving benefit or the benefactor will take the higher of the two. So there’s still going to be some income in the family and they just try to maximize that as much as they can. If you’re married, you pass and you have children or dependent parents also will have a benefit here. And then supplemental benefits.
Al: Yeah. Supplemental for disabled adults or if you’re 65 and older with limited resources, you could get a supplemental as well. Let’s talk about how, where does all the money come from to pay for this? Because everyone’s worried about Social Security funds running out. Well, every single year, our government is collecting Social Security and Medicare from our pay. The Social Security part is 6.2%. The Medicare part is 1.45%. Add those two together. It’s about 7.5%, a little bit more. So that’s how much we have withheld from our paycheck. And then your employer is matching that. They’re paying the same amount. So there’s another 7.5%. So it’s about 15% going to the government for Social Security. That’s what’s paying all of these costs for retirees. Now, if you’re self-employed, you probably heard there’s larger taxes when you’re self-employed. It’s actually the same tax. It’s just that you’re the employee and the employer. So you have to pay both taxes. So it’s about 15%.
Joe: Yeah, the maximum is $168,600. So once you breach that income threshold, then the Social Security tax, the Medicare tax still comes into play. But Social Security tax is no longer taken out of your check. Full retirement age. What is this?
Al: So full retirement age, when you get your Social Security statements, it tells you what you’re gonna receive at full retirement age. And it’s different ages for everybody depending upon what year you were born. So if you were born in 1937 and before, like my parents, then 65 was the age. And then it’s- it’s gradually working up all the way to age 67 so you can look at the chart and see where you stand. So there’s kind of this phase out period to go from 66 to 67. That just simply means your full retirement age is your full benefit. Now you can take it early, you get a lesser benefit. You can take it later and get a greater benefit.
Joe: Your Social Security benefits could be subject to tax. There’s something that’s called provisional income. And what provisional income is, is going to be your adjusted gross income with some, with an add back. And they’re going to take half of your Social Security and add it back to that adjusted gross. And so depending on where your provisional income stands is going to depend on how much of your Social Security is going to be subject to tax. So if your provisional income married is under $32,000, well, there is no tax on your Social Security, your income will be tax-free. If your provisional income is between $32,000 and $44,000, then 50% of your benefit will be subject to tax. What that means is that if your benefit is $20,000, $10,000 of the $20,000 is going to be included in your taxable income. And then if you’re $44,000 and above, up to 85% of that benefit is going to be subject to tax. It’s not an 85% tax. 85% of the income would be subject to tax.
Al: Yeah, that is confusing for people. So basically, it means 85% potentially of Social Security is taxable at whatever tax rate you’re in. If you’re in the 12%bracket, yeah, 22% bracket, whatever it may be, that would be the actual tax rate. Interestingly enough, Joe, when you look at married filing separate, you don’t get much benefit there. It’s a zero. You’re taxed on 85% of Social Security.
Joe: Just notice here that those add backs could be a municipal interest in half of your Social Security. But Roth IRA distributions are not included in provisional income. So as you’re thinking of a tax strategy as you’re creating income from your overall portfolio, if everything is coming from a retirement account, right and then you’re spending more there or you’re taking more than $30,000, $40,000 out, just realize that that’s going to affect your Social Security tax. If you’re going to do a Roth conversion and you’re going to add income, depending on how much other income that you need or want, it’s going to affect your Social Security and it could affect the Social Security tax. So this is important, provisional income, and it really is dependent on how much money that you want to spend in overall retirement. Another quick thing is that if you retire early or if you claim your benefit early, I should say, and you’re still working, I’d be careful here because there’s some add backs here as well.
Al: Well, there is. And so the question is, can you claim your benefits while you’re working? Well, the answer is yes. However, with some caveats, right? So if you are 62 all the way up to your last year of full retirement age, depending upon what it may be for you, you can only make about $22,000. If you make more than that, you’d have to start giving some of it back. A dollar for every $2 of earnings. Now don’t worry, you’re going to have to pay some of it back, however, Social Security recalculates your benefits. It’s not like you’re going to lose anything. You just can’t keep it currently. You can make more in that last year where you turned full retirement age, up to almost $60,000. Once you’re full retirement age, you can make any dollar amount you want, and, and you can keep your Social Security.
Joe: Like I said, it gets a little confusing, folks. If you need help with this, go to YourMoneyYourWealth.com. We got a Social Security handbook. It’s gonna walk you through everything that we’re talking about today, answer all of these questions, and dive in a lot more. YourMoneyYourWealth.com. Click on the special offer. You can download it right there, free of charge. Hey, we gotta take a quick break. We’ll be right back.
Andi: Do you know, right now, how likely you are to run out of money in retirement? There’s an easy way to find out. It’s also free. Go to EasiRetirement. com.
Advanced Social Security Claiming Strategies
Joe: Hey, welcome back to the show. Show’s called Your Money, Your Wealth®. We’re talking about most common Social Security questions. I’m sure you got a few. We got the answers. Go to YourMoneyYourWealth. com. Click on that special offer this week. It’s our Social Security handbook, Social Security handbook. YourMoneyYourWealth.com. Click on that special offer. We’re going to talk strategies, but before we do that, let’s see how you did on the true/false question.
Al: Can I suspend Social Security benefits and restart them at a higher amount? The answer is yes, if you are at full retirement age or older. The answer is no, if you’re under full retirement age.
Joe: Well, yeah, this is a good point. So, let’s say you’re full retirement age and you claim a benefit. Because each year that you wait, you’re going to get an 8% delayed retirement credit. So, you retire at 66 or 67, right, you claim your benefits. And then you get a job offer, or you get something that you can’t refuse that is going to give you some income. You get an inheritance, and you’re like, you know what? Maybe I want to get that 8% delayed retirement credit, so I want to suspend my benefit and let it continue to grow. It’s a pretty unique strategy, you could just stop it, right? And then it’s going to grow 8% per year, so you’re going to receive a lot higher benefit there for the rest of your life. Right, so, depending of course on life expectancy, health, other resources ,and things of that nature, but you can suspend your benefit if you want grow. However, there’s some caveats here.
Al: Yeah, several. So if you’re at full retirement age, you have to be at that age or older and you suspend your benefits, here’s what happens. Can others claim on your record? No, that’s suspended. They can’t claim on your record except for a divorced spouse. So there’s a little caveat there. They can continue to claim on your record. Can you claim on someone else’s record when you’ve suspended your benefits? No, that’s a rule change that happened several years ago. You cannot do that. What about Medicare Part B premiums? Well, now you got to pay for them, right? Because you don’t, you’re not receiving Social Security, so you’re going to be billed for that. Can you continue to receive supplemental Social Security income if you qualify for that? The answer is you are ineligible if you suspend the benefits.
Joe: Yeah. The file and suspend strategy, as Al was alluding to is, is no longer. We still get those questions is that one spouse would file then suspend their benefit. Then the other spouse would claim a spousal benefit, that is no longer. So they’re kind of tightening up the purse strings, if you will.
Al: Well, they are, and then, then it’s like. What’s the break-even age? I mean, how often do we get that question?
Joe: Yeah. So here’s how I think about Social Security is that this is longevity insurance. Is that I want to make sure that I have a certain flesh, a floor or threshold of income when I retire. So the longer I wait, the higher the benefit. The longer I live, the more money I’m going to receive from the overall system. But we don’t know when we’re going to die, right? If we knew that, well then we could tell you the exact age on when to claim this thing. If your benefit is $1000 a month at full retirement age, 67, if you claim it at 62, you’re going to receive a haircut, but you’re gonna get it at 62 versus 67. So some people say, yeah, I want this, I’m gonna take it, take it when I can get it, $700 a month, or I wait until I’m age 70. Well, if I wait till 70, instead of $1000, I’m gonna, I will receive $1240. So it’s a lot larger amount. So it’s like, well, what’s the break-even? How much money am I going to receive from the overall system? And how long do I have to live? Well, this shows us what break-even around 78 to 80 years old?
Al: Yeah, somewhere. And usually we see 79 to 82, something like that. Of course, these charts are usually done with just straight numbers without regard to if you have extra, you invested or time value money. But at least it gives you an idea when the break-even point would be. Next question, Joe. Can I collect my own benefit and a spousal benefit? The answer is no, right? So, so when, when you, you try to claim a spousal benefit, meaning that you’re, you’re married, your spouse is, is receiving Social Security, you can also receive, if you’re the age where you can receive Social Security, you can either receive your benefit or 50% of your spouse’s, you get the higher of the two. So you, you don’t get both benefits. However, the way Social Security Administration does this, is they assume that whatever your benefit was, they add the spousal benefit as well on top of that. And so it’s as if you started claiming your own benefit. So if you switch to your own benefit later, it’s going to be a lower amount because of these deeming rules.
Joe: Clear as mud. What? So maybe I could explain it another way. You’re gonna get 50% of your spouse’s benefit or your benefit, whichever is higher. How the backend works is that they’re gonna take your benefit and then they’re gonna shore you up to get to 50% of your spouse’s benefit. So you’re really getting two benefits.
Al: Sort of. Can I collect my own benefit and a survivor benefit? The answer is no. Survivor benefit is 100% of your spouse’s. Your benefit is whatever your benefit is. You get the higher of the two.
Joe: Yeah, so here’s the reason behind that. So let’s say I’m married. My benefit is $20,000 a month. My spouse’s is $25,000 a month. She passes. My benefit goes to $20,000. I get the higher of the two, so I’m going to take hers. Now it’s $25,000. It’d be great if I could continue to have both of those benefits, but with one spouse passing, I don’t keep mine because mine is lower. I just get shored up again to make sure that there’s the higher of the two. So you’re going to receive 100% of the highest benefit of the family. So that’s why when you’re looking at strategies, is that if there’s a higher benefit wage earner, and maybe that person has a lower or higher life expectancy, right, you want to look at, hey, should someone spouse wait until 70 to have a higher benefit? Because if they were to pass, well, then that highest benefit is going to go to the surviving spouse. So just other things to kind of consider, but you don’t get both benefits. You just get the higher of the two.
Al: Right. Now, how about this? Can I collect Social Security if I have a pension? Well, the answer is yes, but Joe, there’s some pretty big caveats here.
Joe: You got the GPO and the WEP, windfall elimination provision. Basically like if I’m not putting into the system or maybe I qualify to put in Social Security. So I have my 40 quarters or 10 years of earnings that I put into the system. But my other 25 years was a school teacher that I put into the state teachers pool fund. So I no longer put in the Social Security administration, I’m putting into a pension. Do I still receive my Social Security benefit? The answer is yes. However, you’re going to be WEP’t out right? There’s this windfall elimination provision. So they’re going to do a calculation so your Social Security benefit is going to be reduced significantly depending on how many years that you put in the system, right? And when you retire and so on and so forth and then you got the GPO or government pension offsets. This has to do with pension benefits. If you’re looking at survivor benefits, spousal benefits, there’s going to be offsets here too. Because they have, you know, the civil service retirement, let’s say that they’re in that they’re not putting into Social Security. So yeah. A lot of different rules, a lot of different things to consider. You got to look at it all. You know, how do you do that? You go to YourMoneyYourWealth.com. Click on that Social Security handbook, YourMoneyYourWealth.com. It’s our Social Security handbook. Download it for free. Got to take another break. We’ll be right back.
Andi: Do you know right now how likely you are to run out of money in retirement? There’s an easy way to find out. It’s also free. Go to easiretirement.com.
Maxing Out Your Social Security Benefits
Joe: Hey, welcome back to the show, folks. This show is called Your Money, Your Wealth®. We’re talking about the most commonly asked questions in regards to Social Security. Go to our website, YourMoneyYourWealth.com, click on that special offer this week. It’s our handbook on Social Security. It’ll give you all the rules, the regs, strategies, how to maximize your benefits, the mistakes that people make, YourMoneyYourWealth.com. Click on that special offer. It’s our Social Security handbook. Let’s see how you did on that true/false question.
Al: I will automatically be enrolled in Medicare when I claim my Social Security benefits. Depends. I mean, so basically the rule is this. If you if you decide to claim your benefits before age 65, which is your Medicare age, of course, you’re not going to be automatically enrolled because you’re not old enough. But if you’re on Social Security, at that point generally they’ll- you’ll get enrolled at age 65. If you do it later, you may need to sign up for Medicare.
Joe: The rule of Medicare is that you have this window on how to sign up. You want to look at 3 months before or 3 months after or then you start getting penalties on certain parts. You’re going to have to make some decisions on the 65th birthday. If you’re going to stay on existing coverage, if you’re going to take on Medicare. You just have these windows or penalties apply.
Al: Yeah, you do. And I think that’s a surprising thing to people is the penalties, right? If you don’t claim when you’re supposed to, the amount that you have to pay for the insurance is higher. Not only that first year, but every year thereafter. They want you to claim when you need to. Now, if you have, if you’re already, if you’re employed and you’re on a employer’s insurance policy, and there’s a few exceptions here, but then you don’t have to claim as long as you do within a certain period of time after retirement.
Joe: All right, let’s take a look at maximizing the benefit, full retirement age. So if I’ve maxed out my benefit and what maxing out is, is that I paid full boat on FICA tax is this year. It’s about $3800 per month, $2700 if I claimed it at 62 or almost $5000 a month if I wait until 70. So as inflation continues to grow, right, these benefits are getting pretty big, $5000 a month, almost $60,000 a year. You times that by two spouses. That’s a pretty good level income. You know, for someone that to push it out until age 70.
Al: It’s a big number, Joe. So it’s, it’s why you kind of need to make the right decision. Most people take Social Security at 62, 63, 64, but it really does pay to wait if you can afford it. If you think about how they calculate the amounts in the first place, they look at their top 35 earning years, right? You have to have 10 years or 40 quarters to be able to qualify, but they take your top 35 years to figure out the benefit. So if you’ve only worked 10 years, it’s as if you got paid zero for 25 years. So it’s going to dramatically impact your benefits.
Joe: Hey, let’s switch gears real quick. Let’s turn the show over to you all and we’ll answer a few of our questions.
Al: Is there a way to avoid paying taxes on my Social Security income? This is from Holly in Seattle. It’s a great question because from years ago, Social Security, it was a tax-free benefit, right? And the reason is because you pay tax on it in the first place, right? Because you didn’t get a deduction from your pay. So then later on when the government was trying to fix the budget, they decided to make it taxable at certain income levels. But with this provisional income concept that we just talked about, there are ways, Joe, to actually not pay any tax on Social Security.
Joe: Yeah, it’s funny. You know, people get pretty emotional, pretty upset about this. Because FDR back in the ‘30s when announced Social Security was like your Social Security benefits won’t be taxed. And then you go to the ‘80s and it’s like, hey, we have to figure out a way to continue to keep this program solvent. And so that’s where this provisional income concept comes from. And then they put these caps on it. So if you make more than $44,000, then 85% of your benefits are going to be subject to tax. But guess what? Those benefit thresholds were established back in the ‘80s and the problem was is that they never put an index for inflation on it. And so the planning that people really need to do is figure out, hey, if I want to make more than $20,000 or $30,000 a year, if I’m married, or $20,000 a year if I’m single, you have to figure out how to create the income and leave most of the income off of your tax return. How do you do that? It’s by capital gains planning, and it’s by Roth IRA distributions.
Al: Yeah, those are two great ways. So, it’s very hard to avoid it completely, but if you have a lot of money in a Roth IRA. Or maybe a non-retirement account where you just pull money out of savings or maybe you sell some stocks that are not at a huge gain. You can actually have years, maybe many years of paying no tax.
Joe: Yeah, but most people have a lot of their savings in retirement accounts, which is taxed at ordinary income. So it gets more challenging. So some of the planning that you want to continue to be thinking about is that as you’re taking distributions to create the income. How’s it gonna be taxed? And how does that flow into your Medicare premiums? How is that gonna flow into your Social Security and Social Security taxation? So let’s see. What did we learn today? Well, we talked about the basics. All right, there’s a retirement benefits, spousal benefits, survivor benefits, disability benefits. You know, we talked about some advanced strategies on how to claim it, and then looking at maximizing the overall benefit. If you need more help with that, you know where to go. Go to YourMoneyYourWealth.com. Click on that special offer. It’s our Social Security handbook this week. YourMoneyYourWealth.com. Click on that special offer. It’s our Social Security handbook. That’s it for us. Hopefully you enjoyed the show. For Big Al Clopine, I’m Joe Anderson, and we will see you next time.
IMPORTANT DISCLOSURES:
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.
• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
CFP® – The CERTIFIED FINANCIAL PLANNER™ certification is by the Certified Financial Planner Board of Standards, Inc. To attain the right to use the CFP® designation, an individual must satisfactorily fulfill education, experience, and ethics requirements as well as pass a comprehensive exam. Thirty hours of continuing education is required every two years to maintain the designation.
AIF® – Accredited Investment Fiduciary designation is administered by the Center for Fiduciary Studies fi360. To receive the AIF Designation, an individual must meet prerequisite criteria, complete a training program, and pass a comprehensive examination. Six hours of continuing education is required annually to maintain the designation.
CPA – Certified Public Accountant is a license set by the American Institute of Certified Public Accountants and administered by the National Association of State Boards of Accountancy. Eligibility to sit for the Uniform CPA Exam is determined by individual State Boards of Accountancy. Typically, the requirement is a U.S. bachelor’s degree which includes a minimum number of qualifying credit hours in accounting and business administration with an additional one-year study. All CPA candidates must pass the Uniform CPA Examination to qualify for a CPA certificate and license (i.e., permit to practice) to practice public accounting. CPAs are required to take continuing education courses to renew their license, and most states require CPAs to complete an ethics course during every renewal period.
